Tax Avoidance and Evasion

Penny Mordaunt Excerpts

Thursday 13th September 2012 Commons Chamber

[Penny Mordaunt (Portsmouth North) (Con)]

Over the past few months we have heard much about the morality of paying tax, whether it has been through the pillorying of the rich and famous, scrutiny of the conduct of big business operating in the UK or through the auspices of the Christian Aid tax fairness bus currently touring the country focusing on the conduct of UK businesses operating overseas.

Today there has been much discussion about individuals’ and businesses’ tax obligations to the state for the benefit of one’s fellow citizens. We have not heard much about the state’s obligations towards our citizens and businesses with regard to tax collection, and I want to rectify that today. Paying tax, being compliant and paying a fair amount is a two-way street. It is morally right that we should pay our taxes; evasion and aggressive avoidance are wrong. But just as the Government have a moral duty to spend taxes wisely and get good value from our public services, so, too, HMRC has a moral obligation to the taxpayer to ensure that its requests are reasonable and fair.

HMRC has extraordinary powers, frightening in their extent and enormity, that are enshrined in laws seemingly as complex and wide-ranging as the current tax code. Fifteen years ago, the relationship between taxpayer and tax collector was much more evenly balanced. Now there are punitive penalties for failing to submit returns, even if no tax is due or if HMRC owes the taxpayer a refund. The old tax tribunal system has been replaced with one that is far more rigid and less even-handed, and HMRC is able to issue completely unreasonable tax assessments to force taxpayers, who may have a legitimate dispute, to pay tax that they might not owe while their case is being investigated.

I often think that all that is missing from HMRC is the uniform and that it could be argued that we live in a state of financial martial law. It is time that the debate on the morality of tax turned its focus on those extraordinary powers, which often have a detrimental effect on precisely those citizens who have been absent from this debate so far—those on low incomes, the isolated, the vulnerable and older people.

Our tax code is hugely complex. The most popular edition of the tax guide now has over 17,000 pages; if my hon. Friend the Member for Wycombe (Steve Baker) has not read it, he can comfort himself with the thought that he would have had little chance of remembering what was in it if he had.

The system is especially complex for pensioners. In the last year of the Labour Government, the National Audit Office estimated that some 1.5 million older people had overpaid tax. Those overpayments have serious financial implications for the elderly, whose income is about 25% under the national average. Although the elderly are generally more compliant than taxpayers as a whole, they are often less aware of what they should do to comply and what allowances they are entitled to and they are more likely to face massive life changes such as retirement, bereavement or serious changes to their health that bring with them inevitable tax consequences.

Picture the confusion of the 91-year-old who after being widowed becomes a taxpayer for the first time, or the lady with inoperable cancer, whose husband has Alzheimer’s, pursued for failing to provide tax returns that HMRC had been sending to an address she had not lived at for nine years, despite its being clear that her allowances exceeded her income. Imagine the chaos caused to the life of a widow who received a tax demand for £3,500 as the Revenue had not been collecting tax on her state pension due to the fact her P161 was not sent to her when she retired at 60. Picture the gentleman who was being chased for underpayment wrongly, because neither he nor HMRC realised that he was entitled to the blind person’s allowance.

I applaud the work of Age UK, the Low Incomes Tax Reform Group and Tax Help for Older People. With their help, all the examples that I mentioned were resolved with a happy ending—evidence that the staff at HMRC are perfectly reasonable when these issues are pointed out. However, without that professional help and advocacy, many people end up paying more than they owe, with substantial detrimental consequences to their quality of life. That situation is not acceptable.

The complexity of the tax code and the frequency of HMRC errors mean that it is not reasonable to expect the burden of responsibility for checking demands to lie entirely with those vulnerable people. HMRC must at least have some responsibility for its own mistakes, especially if the consequence to the taxpayer of fulfilling that underpayment would be great hardship and would over the long term be detrimental to the public purse, as we saw with tax credit maladministration under the last Government. I would go further and say that HMRC should have an obligation to ensure not only that codes are correct but that for those on low and fixed incomes allowances are being used and people are as tax-efficient as they can be. That should be a performance measure that we judge it against.

Governments must take responsibility for their mistakes too. The Minister will be aware that I have had correspondence with him on the principle of retrospective taxation. It obviously behoves the Government to close loopholes as they are revealed, or better still to anticipate and remove them during the legislative drafting process. Nevertheless, when a loophole has been found in legislation, it is not illegal for it to be exploited—possibly morally repugnant, but not illegal. When clause 55 of the 2008 Finance Bill was discussed in Public Bill Committee, the Minister voiced the Conservative Opposition’s concern about its retrospective nature. If it was wrong to legislate retrospectively in 2008, it cannot be right now. We must work to close tax avoidance loopholes, but we must consider whether it is morally justifiable to take retrospective action on tax avoidance in the case of relatively low earners who signed up to schemes that were advertised openly and publicly and of which the Government and HMRC were aware.

Finally, I want to raise the subject of digital exclusion, specifically in relation to HMRC’s policy which makes it compulsory for all businesses, including the smallest, to file their business returns online. As a result, the proprietors of many micro-businesses who are unable to use a computer—for various reasons, including disability, age and lack of broadband access—have had to incur often disproportionate costs to employ an agent to file online for them or face penalties for not being able to file by electronic communication. Several proprietors have appealed their penalties, and those appeals are waiting to be heard by the First-tier Tribunal in November this year. The amounts charged are tiny—£100 for not filing online—but the costs to HMRC and the public purse in pursuing these cases are significant. The three lead cases involve older people, all with disabilities, who are unable to file online, and there is no statutory exemption for those with disabilities. There are many examples of otherwise compliant taxpayers being pursued relentlessly for small sums because of their inability to move to a digital channel to transact with HMRC.

The age of austerity and the recent focus on the moral good of paying taxes should not give HMRC any respite from simplifying the tax code, publicising allowances, reducing errors, and supporting businesses in hard times. It is in its interests and everyone else’s that it does so. It is better for the public purse that a business that has been paying tax on time for decades but has fallen on hard times survives and those jobs are kept. It is better for the public purse that an older person has that little bit of extra income to which they are entitled in order to stay well and independent. It is better for the public purse that HMRC’s resources are not taken up with correcting silly mistakes and are focused on tackling high-value evasion and aggressive avoidance.

I congratulate the Minister on the progress that he has made in simplifying the tax code, promoting common sense, and lifting many people out of paying tax altogether. May I urge him to go further, faster for the benefit of the Exchequer and the most vulnerable in our society?